Women-only venture capital funds don’t necessarily help female entrepreneurs

A recent report by European Women in VC revealed that while 2021 was a great year for startup fundraising overall, very little of that money found its way to female-led startups. Indeed, data shows that only 2% of available venture capital went to all-female startups, down from the already abysmal 3% in 2020. By the way, it might be worth noting that mixed teams fared little better, providing only 9% of available capital.

In 2019, a report by the Boston Consulting Group (BCG) brought to light the harsh reality of equality in entrepreneurship around the world. It claims that if entrepreneurship levels were equal between men and women, the global economy would grow by $5 trillion. This represents global GDP growth of 6%, which, to put it in context, is slightly higher than the World Bank’s recent economic forecast for the global GDP hit from COVID-19.

In a separate report, BCG argued that this premium is possible because startups run by women tend to outperform those run by men. Indeed, female entrepreneurs have been found to generate roughly twice the financial return on investment for backers than their male counterparts.

“It has recently been proven that a company with more women in the driver’s seat and greater engagement in company management creates more balanced and successful businesses complimented by happy staff and a strong work ethic,” says Helen Ruth Payne, CEO of Goldrange Resources. “Women-led companies provide an opportunity for the other 50% of the skilled workforce to be employed, allowing flexibility and understanding about the role of a professional as a mother, who in other circumstances may not be able to practice in a fast-paced and well-paid profession. “

A recent report by the Innovation Financing Advisory Board to the European Commission and the European Investment Bank (EIB) highlights the ongoing challenges women entrepreneurs face in accessing finance and support to set up and scale their businesses. The report highlights the lack of female representation among founders and investors as a contributing cause.

Benevolent support

A frequently proposed solution to this situation is for women to take a greater role in the investment community and for these women investors to then support women-led businesses. Unfortunately, the INSEAD research argues that such proposals may actually do more harm than good in terms of ensuring greater equality of investment in startups.

Indeed, the study shows that women-owned startups that receive support from female venture capitalists are twice as likely to secure additional funding compared to startups backed by male investors. It’s a finding that contradicts the idea that the gap in female entrepreneurship can be solved by ensuring there are more female investors.

“We hypothesize that the reason for these results is not that female investors are not good at selecting or backing young startups. In fact, we find that investor gender does not matter for male-founded startups. However, for female founders, being backed by a woman affects how they are perceived by other investors,” the researchers explain.

“We saw in a series of experiments where our participants evaluated pitches from male and female founders that female founders who received support from a female investor were perceived by observers as less competent and therefore the business idea as less promising.” “

Undermining success

As a result, it appears that, while well-intentioned, the desire for more women to invest in women can both place a heavy burden on female investors and undermine the long-term success of female entrepreneurs.

“What’s interesting is that female founders who receive investment from both male and female investors seem to do very well. This shows us that the practice of matching women investors with women entrepreneurs can be counterproductive. Instead, venture capital firms and their startups may benefit more from building inclusive investment teams,” the researchers explain.

This is perhaps somewhat worrying as last year a group of 25 female investors from across Europe called for a €3 billion fund specifically for female-led venture capital firms to better represent women’s interests and help supporting women-led start-ups.

The proposal, made by the European Women in Venture Capital Group, aims to address the ongoing challenges women entrepreneurs face in raising money. The proposal was warmly welcomed by Maria Gabriel, European Commissioner for Innovation, Research, Culture, Education and Youth, who said “more diversity at the investor level leads to more diversity at the portfolio level”.

If the INSEAD research is correct, then this assumption may need to be re-examined and alternative approaches explored to close the gender gap in investment and ensure that women entrepreneurs do get the support they need.